The number of lenders reporting loan covenant breaches rose sharply in the first half of 2019, mainly because of the turmoil in the retail sector. And according to one lender, as many as 200 to 300 shopping centres could be facing debt pressures.

In the latest Commercial Real Estate Lending Survey compiled by Cass Business School, lenders reported a 13% rise in the first half of 2019 in breaches likely to lead to loan defaults, compared to the same period in 2018. Lenders with a high exposure to retail and development loans were most likely to report breaches. In most cases it was loan-to-value covenants that had been breached.

The actual rate of loans in default remained flat at about 2.5%, Cass reported, implying that lenders are not yet officially putting loans into default.

Lenders are increasingly shrinking their exposure to retail by not extending new loans to the sector, or asking for more equity to be put in when existing loans need refinancing. In 2007, 26% of UK commercial property debt was secured against retail assets, but Cass said that figure had fallen to 15% at the midpoint of this year.

Nicole Lux, the report’s author, said the vast majority of retail lending is likely to be held against prime assets, with lenders shunning secondary assets entirely. The lending margin on secondary retail assets now stands at 330 to 600 basis points even for loans with LTVs of below 50%.

In anonymous comments published in the report, lenders laid bare the scale of the issue they are facing when dealing with retail loans where income is under pressure and the value of assets has dropped significantly.

“We estimate that of 650 UK shopping centres, 200–300 are in trouble,” one lender told Cass.

"Secondary shopping centre assets are only slowly going into receivership, this is mostly because lenders and borrowers/owners are trying to avoid a receivership at all cost,” another said. “The lenders are not keen on appointing receivers if there is no clear exit strategy for the centre.”

Earlier this year, Oaktree lost control of a portfolio of three UK shopping centres after the value dropped. Mezzanine lender DRC has taken control of the portfolio.

This month React News reported that UK REIT RDI would be selling a portfolio of four UK shopping centres for less than the £145M of debt secured against them, meaning its equity will be wiped out and its lender will take a loss, too.

Worse could be to come for the retail property sector: According to the British Retail Consortium, this September was the worst since the 1990s for retailers.

Loan origination in the first half of 2019 was £23.3B, up 4% on the same period of last year, in spite of the fact that transaction levels are down by a third, the Cass report found. That is because the amount of refinancing has increased. The total amount of debt secured against UK property has grown 6% since mid-2018 to £206B.

The report found that German banks, wary about Brexit, have pulled back from the market, with their origination levels dropping by 30%. Other international banks, UK lenders and nonbank lenders all picked up that slack.